July 31, 2007

I guess everyone at some point in time have opened fixed deposit/time deposit (FD) accounts before, especially for us, Malaysians who have very high savings percentage. In fact, there are billions of Ringgit being kept in FD accounts in our banking system now.

So why is FD so popular? Well, some part of it is due to legacy reason. In the older days when there wasn't any viable financial instruments to invest in, FD is considered the de facto choice. It is relatively safe (guaranteed by the government), and offers high liquidity (easy to redeem/withdraw to cash). It is because of these two reasons that so many people, especially the elders, trust FD so much.

Some of you might question on why we need FD since we can get higher interests by investing in unit trusts/shares. My personal opinion is that all of us should have FD as a part of our financial portfolio because:

As a liquid source of money for short term needs - the money that you need to use in 6 months to a year should be kept in a liquid position. FD is a good choice, especially if you can keep it in monthly term.

Safe investment - even though the interest rate is quite low at the moment, we should consider keeping some money in FD due to its safe investment nature.

As a summary, just keep enough money in FD for your short term needs, and invest the rest in other financial instruments. We will explore other options in the future article!

July 30, 2007

A lot of us saves our monthly pay in a basic savings account. Depending on your needs / requirements, this might not be an optimum way of enhancing your returns. Let's explore the basics of some of the most common cash management accounts that we have in the market now.

Typically, cash management accounts can be divided into 2 main streams: Conventional and Islamic accounts. Conventional accounts basically means that the bank will pay you an interest for the money that you loan / deposit to the bank. Islamic accounts operate based on profit sharing concept, i.e. the bank will use the money to generate income that is compliant with Syariah laws. Then the returns are shared (either in 70:30 or 60:40 ratio) between the bank and you, as the co-owner of the money. So, what is the difference? To non Muslim folks, it doesn't makes a difference since the returns are almost similar, but for our Muslim friends might feel comfortable with Islamic accounts.

Both Conventional and Islamic cash management accounts have different products to cater to different needs/groups of people. These products can be categorised as follow:

Savings accounts - you are normally issued a passbook and you will not be charged any monthly fees/service charges.You will normally earn peanuts from the interests (normally 0.1 - 0.3%). I don't encourage you to save in this kind of accounts since our objective is to maximize our returns!

Current accounts - you are given a cheque book and issued a monthly statement for tracking purposes. This type of accounts will normally not be given interest but instead will be charged monthly fees for maintenance and statement printing purpose. Again, this is not we want to achieve our objectives.

Hybrid accounts - this is basically a current account that earns you interests. You will have the flexibility of current account and earn some extra cash as well. For some banks, they don't charge any monthly fee should you maintain a minimum deposit monthly or half yearly. For others, they might charge a nominal fee monthly.

As a recommendation, I would encourage you to make use of hybrid accounts since you have the flexibility and earn interests as well. The key is to find the suitable hybrid accounts that suit you cash level so as to minimize your costs (due to monthly charge) and maximize income (higher interests earned).

For this kind of hybrid accounts, most banks will require you to maintain average monthly balance of RM5,000 and some other banks RM10,000. Some of hybrid accounts that we have in the market are:

Let's review the type of accounts that you use now and see whether it can maximize your returns. If it doesn't, then it's time to scout for the hybrid account that will cost you least but earn you most. This doesn't mean that you have to put all your money into such accounts since there are many more instruments that we can explore further in the future articles.

It is a common believes that most people knows what to do when they don't have enough money at the end of the month, i.e. by tightening their belts to last a few more days. But how many of us really knows what to do with our spare/extra cash that we have?

In Malaysian context, some of the most common financial instruments that we can invest our spare cash in are as follow:

Savings/Current/Hybrid accounts - or as i termed it cash management.

Fixed deposit - a.k.a time deposit

Unit trust

Shares - common shares or REITS

Property

Of course there are many other instruments that are not as common, such as futures, options and commodities trading. For high net worth individuals (i.e. rich people), there are even more choices, such as structured investments that require initial deposits of at least RM250,000.00 or even more.

So, in the next couple articles, i will try to share more information on the common financial instruments that we can park our hard earned money as listed above.